US Financial Crisis: Is It the Moment for Bretton Woods II?

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"Economic health of a country is a proper matter of concern to all its neighbours, near and distant."1

- F.D. Roosevelt, Former US President

"It took the world 15 years and a World War to come together to address the weakness in the global
system that contributed to the great depression. It is to be hoped that it will not take us that long this
time; given the level of global interdependence, the costs would simply be too high.2"

- Joseph E. Stiglitz, Nobel-Winning US Economist

"You never want a serious crisis to go to waste.And what I mean by that is an opportunity to do things
you think you could not do before."3

- Rahm Emanuel, US President-Elect Barack Obama’s New Chief of Staff

US Financial Crisis: Is It theMoment for Bretton
Woods II?

To discuss theUS financial crisis (2008) that has engulfed thewholeworld and therefore requires
synchronised coordinated global action, the US President George Bush invited the leaders of the
G20 - comprising both industrialised and emerging nations - to ameeting inWashington to be held
on November 15th 2008. The British Premier Gordon Brown (Brown) and the French President
Nicholas Sarkozy (Sarkozy) and many others have seized the opportunity to call for a rerun of
BrettonWoods - the BrettonWoods II - to fashion a consensual international financial architecture
to prevent any replay of the global financial crisis. It is presumed that at the deep bottom of the USoriginatedworldwide
financial turmoil, there lies the internationalmonetary disorder that has kept on
snowballing sinceAugust 15th 1971, when the first BrettonWoods system, tied to gold-convertible
dollar, was brought to an abrupt close.

The History of First BrettonWoods System: Reasons for the Origin and the End

The origin of BrettonWoods lay in the Great Depression of 1930s that prompted governments
across the world to adopt protectionist policies- contrary to the intention of maintaining domestic
employment - which led to massive unemployment born out of contraction in international trade.
ThoughWorldWar II brought Great Depression to an end, the underlying causes of the Depression
were not extinct. Nor was anyone approving of a tragic war to provide relief from an economic
slump. Hence, between July 1st 1944 and July 22nd 1944 - in the midst of the war scenario
solidarity - 730 representatives from44 allied nations converged in theMountWashington Hotel
of Bretton Woods in New Hampshire to formulate a system that could prevent subsequent
occurrence of the Depression-like situation. The principal negotiators were the US Treasury Top
Staffer HarryDexterWhite (White) and the UKTreasuryAdvisor JohnMaynard Keynes (Keynes)
while the proceedings were chaired by the then US Treasury Secretary HenryMorgenthau. Keynes
wanted avoidance of painful deflationary policies by deficit countries and hence proposed trade
surplus countries to lend to trade deficit countries. ButWhite did not want to part with his country’s
surpluses automatically and coveted control over policies of debtor nations.4 A compromise was
hammered out which was much closer to White’s plan reflecting US’ growing dominance and
UK’s waning influence. However, all agreed on the fundamental disadvantages of the unrestrained
flexibility of exchange rates prevalent during the inter-War period that discouraged trade and
investment and encouraged speculation in the currency market.